micro economics chapter 19

19
Antitrust Policy and Regulation

McGraw-Hill/Irwin

.
Copyright © 2012 by The McGraw-Hill
Companies, Inc. All rights reserved.


Antitrust Laws

• The purpose:
• Prevent monopoly
• Promote competition
• Achieve allocative efficiency
• Historical background
• Regulatory agencies
• Antitrust laws
LO1


Antitrust Laws

• Sherman Act 1890
• Made restraint of trade and
monopolization illegal
• Injured firms can sue for treble
damages
• Department of Justice or injured
firms can initiate suits

LO1


Antitrust Laws

• Clayton Act 1914 – Illegal if
competition is reduced
• Outlaw price discrimination
• Prohibit tying contracts
• Prohibit stock acquisition
• No interlocking directorates

LO1


Antitrust Laws

• Federal Trade Commission Act 1914
• Power to investigate unfair
business practices of firms
• Cease and desist orders
• Wheeler-Lea Act 1938
• Made fraudulent advertising
illegal
• FTC investigates fraudulent
advertising
LO1

Antitrust Laws

• Celler-Kefauver Act 1950
• Made all mergers illegal if
competition is significantly reduced

LO1


Antitrust Policy

• Issues of interpretation
• Monopoly behavior or structure
• 1911 Standard Oil Case
• 1920 U.S. Steel Case
• Rule of reason
• 1945 Alcoa Case
• The relevant market
• 90-60-30 rule

• 1956 DuPont Cellophane Case

LO2

• Issues of enforcement


Antitrust Policy

• Issues of enforcement

• Active antitrust perspective
• Laissez-faire perspective

LO2


Effectiveness of Antitrust Laws

• Monopoly
• AT&T
• Microsoft Case
• Mergers
• Horizontal merger
• Vertical merger
• Conglomerate merger
LO2


Mergers

• Price fixing
• Per se violation

• Price discrimination
• Tying contracts

LO2

Industrial Regulation

• Natural monopolies
• Economies of scale
• Public interest theory of regulation

• When it’s beneficial to have a single firm
price and output must be regulated by
government to prevent abuse of power

LO3


Problems with Industrial
Regulation

• Costs and inefficiency
• No incentive to reduce cost
• X-inefficiency
• Perpetuate monopoly
• Legal Cartel Theory
• Regulating potentially competitive
industries
• Firms desire regulation
LO3


Deregulation

• Began in the 1970s

• Has produced large net benefits for
•

LO3

consumers and society
Industries deregulated include:
• Airlines
• Railroads
• Telecommunications
• Electricity


Social Regulation

• Concerned with the conditions under
•
•
•

LO4

which goods and services are
produced
Impact of production on society
Physical qualities of goods
Applied “across the board” to all
industries

Social Regulation

LO4


Social Regulation

• Optimal level of social regulation
• In support of social regulation
• Criticisms of social regulation

• High costs, higher prices
• Uneconomical goals MBpersonnel
• Inadequate information
• Unintended side effects
• Slower innovation
• Reduced competition

LO4